Benchmarking study finds oil operating costs are up 61 percent

Published 11:31 am, Wednesday, July 18, 2012

Midland Independent School District received $53.2 million in oil and gas tax levies in the 2014 fiscal year

Midland Independent School District received $53.2 million in oil and gas tax levies in the 2014 fiscal year

Photo: Mikhail Kokhanchikov

Benchmarking study finds oil operating costs are up 61 percent

1 / 1

Back to Gallery

Among the ripple effects high crude oil prices have had on the Permian Basin's energy economy is climbing operating costs.

Ziff Energy Group, in its recently completed seventh benchmarking study of Permian Basin operating costs, said unit operating costs soared 46 percent since its last study in 2007. The company studied 100 Permian Basin fields, including 15 carbon dioxide tertiary fields, a sample that accounts for nearly a quarter of Permian Basin oil production and a fifth of natural gas production.

The study found the average operating cost for oil fields rose 61 percent to $16.77 a barrel since 2007, in line with the rise in oil prices during that same period. The increase is attributed to the rise in oil prices, which directly impacted the severance and ad valorem taxes paid by producers. Operators also have been challenged by rising service costs.

Some of the companies that submitted their operating cost data for the study realize that concept, he said, while others mainly are focused on getting their wells online.

"For some, this helps them prioritize the opportunities; they may recognize they have several areas they can focus on" where adjustments would bring more bang for the buck, Turchin said.

Operating cost data for the 12 months from July 1, 2010 to June 30, 2011 was used in the study. Of the 11 operators participating, nine were independents of various sizes. The fields were grouped into five oil asset groups and two gas asset groups to be compared against like-kind peers and waterfloods were grouped based on geologic formation and CO2 floods were put in a separate peer group. Cost data was placed in 13 standard classifications.

Tucker noted the study takes costs down to field level. "In one field, high costs may be taxes; in another field, high costs may be service repairs."

The two men, along with other senior advisors, have been in town this week meeting with clients who participated in the study. Tucker and Turchin said clients are confirming that "they see what we see and it makes sense," Tucker said. He added that one producer "said he got a series of 'aha' moments out of the findings."

Sometimes, Tucker observed, a producer may thing he's doing well but "they don't always have a window into how others are doing."

Producers, the study found, were able to lower the cost of their purchased energy, primarily electricity and lower natural gas prices reduced the value of the gas consumed at the lease. Leading operators were able to lower their average operating cost below $7 a barrel.

Operating costs for natural gas fields fell 11 percent to nearly $1.20 per Mcf following the drastic fall in natural gas prices over the past four years. However, core costs rose 15 percent, meaning gas margins are underwater. Leading operators were able to lower their average operating cost to below 50 cents per Mcf.

Taxes comprised the biggest expense for producers, making up 32 percent of the operating costs for natural gas fields and 26 percent for oil fields.

Operators participating in the study, said Tucker, "are showing leadership on their part to put time and money into this study. They're showing bonafide interest in improving their operations to have their performance measured."

Ziff also offers producers an Elevating Operations Performance assessment, assigning senior advisors to work with an operator on a specific field. The three-month process includes a visit to the field and brainstorming sessions with the operator's technical and field personnel. At the end, Tucker said, the client will receive an action plan, complete with assigned responsibilities, to lift the performance of the field. The senior advisors, he said, are often industry veterans who, though retired, don't want to completely leave the business. This, he said, gives them an opportunity to mentor the younger engineers entering the industry.

In September, the company intends to conduct a Best Operating Practices workshop for study participants, where leading operators will be asked to make presentations on their best practices and how they achieve efficiency while controlling costs. Operators who have not yet participated in the benchmark study still can submit their data to Ziff and be eligible to participate in the workshop.